GDS Holdings Limited: FY2019 Form 20-F Summary
Business context and reporting period
GDS Holdings is a Cayman Islands company developing and operating carrier- and cloud-neutral data centers primarily in China, with services including colocation, managed hosting and managed cloud services. The filing is an audited annual report for the fiscal year ended December 31, 2019, prepared under U.S. GAAP. The source text does not provide a separate fourth-quarter 2019 income statement; the figures below are full-year results and year-end balances.
- ADSs trade on Nasdaq under “GDS”; each ADS represents eight Class A ordinary shares.
- As of December 31, 2019, the company operated 225,963 sqm of area in service, with a 91.9% commitment rate and 69.0% utilization rate, excluding joint venture data centers.
- Area under construction was 89,834 sqm, with a 63.6% pre-commitment rate. Customers included 624 enterprises, primarily cloud providers, internet companies and financial institutions.
Financial performance and key metrics
| Metric | 2018 | 2019 | Change |
|---|---|---|---|
| Net revenue | RMB2,792.1 million | RMB4,122.4 million | +47.6% |
| Gross profit | RMB622.4 million | RMB1,042.7 million | +67.6% |
| Gross margin | 22.3% | 25.3% | +3.0 percentage points |
| Income from operations | RMB168.4 million | RMB479.8 million | +185.0% |
| Operating margin | 6.0% | 11.6% | +5.6 percentage points |
| Net loss | RMB430.3 million | RMB442.1 million | Loss increased 2.7% |
| Net loss attributable to ordinary shareholders | RMB430.3 million | RMB500.2 million | Includes preferred-share charges in 2019 |
| Adjusted EBITDA | RMB1,046.5 million | RMB1,824.0 million | +74.2% |
| Adjusted EBITDA margin | 37.5% | 44.2% | +6.7 percentage points |
Revenue growth was driven by higher utilized capacity, new data centers entering service, new customer contracts and acquisitions. Colocation revenue rose to RMB3,261.7 million, or 79.1% of total revenue; managed services and other services contributed RMB832.8 million; and equipment sales contributed RMB27.8 million.
- Cost of revenue increased 41.9% to RMB3,079.7 million, below revenue growth. Utility costs rose 40.6% to RMB922.8 million and depreciation and amortization rose 57.5% to RMB1,071.7 million.
- Operating expenses increased 24.0% to RMB562.9 million, while operating expenses as a percentage of revenue declined to 13.7% from 16.3%.
- Net interest expense increased to RMB915.7 million from RMB637.0 million, reflecting higher borrowings, finance lease obligations and convertible debt.
- Net loss remained substantial because interest expense, depreciation and amortization, share-based compensation and other non-operating costs exceeded operating income.
Cash flow, liquidity and leverage
| Metric | 2018 | 2019 |
|---|---|---|
| Cash flow from operating activities | RMB(12.9) million | RMB293.4 million |
| Cash flow from investing activities | RMB(4,733.1) million | RMB(5,131.2 million) |
| Cash flow from financing activities | RMB4,876.8 million | RMB8,361.9 million |
| Cash at year-end | RMB2,161.6 million | RMB5,810.9 million |
| Total cash and restricted cash | RMB2,284.7 million | RMB5,973.3 million |
- Capital expenditures, excluding acquisitions, were RMB4,552.6 million in 2019, primarily for data center equipment, land use rights and leasehold improvements.
- Total debt-related obligations were approximately RMB16,189.5 million, including borrowings, finance lease and other financing obligations and convertible bonds.
- Short-term debt was RMB1,360.2 million; long-term debt was RMB14,829.3 million. Total loans and borrowings were RMB9,166.2 million, with weighted-average rates of 5.64% for short-term borrowings and 7.40% for long-term borrowings.
- The company had RMB11,984.4 million of working-capital and project-financing facilities, of which RMB2,587.6 million was unused. Management stated that available cash and expected operating cash flow should fund obligations, debt service and planned spending for at least the next 12 months, while acknowledging potential need for additional financing.
- Contractual obligations totaled RMB24,796.9 million, including RMB10,727.0 million of long-term borrowings and interest, RMB8,491.7 million of finance lease and other financing obligations, RMB1,243.7 million of operating lease commitments and RMB2,726.6 million of capital commitments.
Material changes versus the prior comparable period
- Revenue growth accelerated the operating margin and gross margin, while utilization rose from 67.6% to 69.0% and pre-commitment increased from 48.4% to 63.6%.
- Operating cash flow turned positive, but investing cash outflows increased as the company expanded its data center portfolio.
- Cash increased materially, primarily because of debt financing, public equity offerings and the issuance of redeemable preferred shares.
- In March and December 2019, the company completed follow-on offerings that generated gross proceeds of US$445.0 million and US$278.2 million, respectively. It also issued US$150 million of convertible preferred shares in March 2019.
- Redeemable preferred shares had a December 31, 2019 redemption value of RMB1,062.0 million and generated RMB58.1 million of redemption-value and cumulative-dividend charges to ordinary shareholders.
- Share-based compensation increased to RMB189.8 million from RMB105.9 million, and unrecognized compensation expense was RMB360.5 million at year-end.
- Goodwill increased to RMB1,905.8 million from RMB1,752.0 million; management reported no goodwill or long-lived-asset impairment charges for 2019.
- The company completed a VIE restructuring in late 2019, transferring legal ownership of GDS Beijing and GDS Shanghai to Management HoldCo, owned by five management shareholders, while retaining contractual control and consolidation under U.S. GAAP.
Guidance, outlook, risks and unusual items
The filing does not provide formal numerical revenue, EBITDA or capital-expenditure guidance. Management expects continued demand for high-performance data centers, cloud computing and digital infrastructure, but expects substantial capital requirements and continued reliance on debt and equity financing.
- COVID-19: The early-2020 outbreak could delay construction and acquisitions, disrupt operations, slow customer payments, increase receivable losses and restrict access to financing. The filing states that the financial impact could not be reasonably estimated at the filing date.
- Leverage and refinancing: Debt agreements contain financial covenants, cross-default provisions, collateral requirements and change-of-control or shareholder-ownership triggers. Certain facilities could require accelerated repayment if STT GDC ownership falls below specified thresholds or if required IDC licenses are not maintained.
- Regulatory and VIE exposure: Approximately 97.4% of 2019 revenue was attributed to consolidated VIEs. PRC regulators could challenge the contractual structure, IDC licensing, foreign-investment restrictions or historical service arrangements, potentially resulting in fines, operating restrictions, restructuring or deconsolidation.
- Customer concentration: Three end-user customers generated 27.2%, 19.1% and 10.8% of 2019 revenue. The three largest customers represented 30.6%, 21.1% and 10.4% of committed area at year-end.
- Capacity and operating risk: The business is exposed to power availability and costs, construction delays, utilization shortfalls, service outages, cybersecurity incidents, lease and property-title deficiencies, and limits on data center development in major Chinese markets.
- Preferred securities and dilution: Preferred shares accrue a minimum 5.0% dividend for the first eight years, rising to 7.0% thereafter with further increases if outstanding. They are convertible at an initial price of US$35.60 per ADS, subject to adjustments.
- Legal proceeding: A securities class action was dismissed in April 2020, but the dismissal was not yet final when the filing was issued because the appeal period had not expired.
- Audit and market-access risk: The filing notes that the company’s China-based auditor was not subject to PCAOB inspection at that time, creating potential future filing, audit and Nasdaq listing risks.
Most important facts for an investor to verify
- Whether operating cash flow can sustainably cover interest expense and a meaningful portion of planned capital expenditures.
- The maturity schedule, refinancing requirements, covenant headroom and variable-rate exposure associated with approximately RMB16.2 billion of debt-related obligations.
- The status and renewal of all IDC licenses and the continuing enforceability of the VIE contractual arrangements under evolving PRC rules.
- Customer move-in rates, utilization, churn, renewal outcomes and exposure to the three largest customers.
- Power availability, construction timelines, committed versus utilized capacity and the economics of new data centers.
- The effect of COVID-19 and subsequent macroeconomic conditions on collections, construction, acquisitions and financing access.
- The potential dilution and cash obligations from convertible preferred shares, convertible notes, options and restricted shares.
- The recoverability of goodwill and deferred tax assets, including RMB205.976 million of valuation allowance against deferred tax assets and RMB1,905.8 million of goodwill.